Seagate Technology: Ready to Breakout

Seagate Technology (STX) announced second quarter ended January 1, 2016 total revenue of $2.99 billion, up slightly and sequentially from $2.93 billion in first quarter of fiscal 2016 but down 19 percent year-over-year from $3.70 billion in second quarter of fiscal 2015.

Seagate declared second quarter of 2016 non-GAAP net income of $246 million or $0.82 per diluted share, up 49 percent sequentially from $165 million or $0.54 per diluted share in first quarter of fiscal 2016 but down 46 percent year-over-year from $452 million or $1.35 per diluted share during the same period last year.

The key PC technology company reported continued year-over-year decline in both its top and bottom lines primarily due to the ongoing cannibalization of the global PC market share by the mobile and handheld devices which are increasingly replacing PCs and thus, continuously hurting the company’s key margins.

After the continued decline in both revenue and adjusted gross margin for Seagate since third quarter of fiscal 2015 till the first quarter of fiscal 2016, the company has impressively posted sequential growths in both its top line and non-GAAP gross margin for second quarter of fiscal 2016 and mainly driven by solid profitability and superior cost controls achieved across the company’s product portfolio.

Positive moves

Seagate has continued to grow its year-over-year average capacity per drive and total exabytes shipped which highlights the company’s confidence on its drive business that is increasingly facing headwinds from the expanding popularity of mobile and handheld devices, gradually eating into the worldwide PC market share.

The data storage products provider has continued to witness sharp year-over-year declines in both its top line and gross margins with an expanding long-term debt profile, driven by significant fall in the global PC market share to the increasing popularity of mobile devices and this trend is believed to continue over the longer term thus, forcing Seagate to look out for new revenue streams.

However, the company is continuing to grow average capacity per drive and witnessing rising shipments of STX Exabyte.

Robust financials

During the second quarter of fiscal 2016, Seagate delivered nearly $382 million of cash flow from operations and thus, disbursed $188 million worth of dividends and bought back about 2.9 million ordinary shares at $107 million. Moreover, nearly 296 million ordinary shares were outstanding till the quarter end. Seagate recorded a total of about $1.3 billion of short-term investments, cash and cash equivalents by the quarter end. In addition, the Board of Directors at Seagate recently approved $0.63 per share of cash dividend for the quarter payable February 23, 2016 to all the key stakeholders as of February 9, 2016.

Despite, the ongoing recent fall in both the company’s top line growth and key gross margins Seagate is committed towards returning a majority of the invested capital to its key stakeholders in form of dividends and strategic share repurchases which should further attract several other key investors to make equity investments in the company who are looking for making investments in technology stocks.

Seagate recently launched Seagate ClusterStor G200 Spectrum and ClusterStor L300 which are high performance computing (HPC)-class storage solutions. Further, ClusterStor HPC drive was uniquely launched by Seagate that has capability to get combined with the ClusterStor L300. Seagate declared the establishment of Seagate Government Solutions which is a unique U.S.-based business segment particularly developed to help address the expanding data-management requirements of key government agencies.

Also, Seagate declared the introduction of the SAGE European Exascale HPC project through which the company would work closely with nine strategic partners across different sectors, industries, and nations to advance its data storage capabilities.

The latest new introductions of superior data storage solutions coupled with strategic partnerships with key government agencies is believed to somewhat help the company offset the continued decline in its top line and strongly position it for sustainable long-term growth once the global slowdown eases.

The rising global popularity of solid state drive (SSD) over the traditional hard disk drive (HDD) is mainly driven by the low cost of SSDs which is approximately $0.40 per usable gigabyte and this declining pricing trend for SSDs is expected to continue as their demand continues to rise, thereby posing significant threat for key hard drive manufacturers including, Western Digital and Seagate. A majority 40% of the SSD market share is currently captured by Samsung.

Conclusion

Overall, the investors are advised to “Hold” their position in Seagate Technology Public Limited Company considering the currently weak global demand for hard disk drives and the company’s hugely debt-burdened position with notable total debt of $4.14 billion against smaller total cash position of $1.26 billion only, restricting the company to make future growth investments. However, the PEG ratio of 3.22 suggests healthy company growth and somewhat better than the industry’s growth average of 0.56. The profit margin of 5.14% also seems satisfactory.